FacebookTwitterGoogle+RedditEmail

The Push for Sequester Cuts

by ERIC ZUESSE

Republicans in Congress have decided to reject economists, the Congressional Research Service, and the International Monetary Fund, in order to argue that the sequestration cuts will be good for the economy.

To do this, they also misstate Keynesian economics, and they attack Keynesianism by describing a straw man and by then saying that this straw man is Keynesian economics, even though the economic theory they’re attacking originated nearly two centuries before Keynes was even born.

Republican Congressman Kevin Brady of Texas is the new Chairman of the Joint Economic Committee of Congress, and he is leading the Republicans’ charge on this. In the Republican magazine National Review, he headlined on February 21st, “What Kind of Cuts Grow the Economy?” (which assumes that some kind of cuts do “Grow the Economy”), and he argued that, “Time and again, economic studies have shown that countries that reduce their government deficits through spending cuts – rather than tax increases – can boost economic growth and job creation even in the short term.” He cited as his source there the report that his own office had produced for the Joint Economic Committee Republicans, “Spend Less, Owe Less, Grow the Economy,” which was dated 15 March 2011.

However, he ignored the much more recent report from the Congress’s own nonpartisan research arm, the Congressional Research Service, which was dated 11 January 2013 and titled “Can Contractionary Fiscal Policy Be Expansionary?” which stated boldly, “This view [Brady’s] contrasts with that held by most economists and found in conventional models. In those models, cutting spending will contract the economy. Chairman Bernanke of the Federal Reserve was referring to this view when he cautioned against large and immediate spending cuts.”

The CRS study (which Brady and other Republicans ignore) went on to cite grave deficiencies in the studies that Brady was relying upon. For example, the CRS report noted that a 2010 study from the IMF, “Macroeconomic Effects of Fiscal Consolidation,” which was much more comprehensive than the chief study that Brady’s report had relied upon (which was issued in 2009), obtained results that “are consistent with the mainstream view of fiscal policy” and it found “that deficit reduction has a contractionary effect on output, with deficit reduction equal to 1% of GDP reducing output by 0.5% of GDP.” Furthermore, “Some recent analyses have questioned the applicability of Alesina and Ardagna’s findings [the findings in the 2009 study upon which Brady’s JECR report had chiefly relied] to the current U.S. fiscal situation.”

Moreover, the IMF itself had previously been prejudiced against Keynesianism, and now even admitted it, and basically apologized for that. On 5 January 2013, I headlined, at businessinsider, “The IMF Admits It Was Wrong About Keynesianism,” and I linked there to the new “IMF Working Paper” from their chief economist Olivier Blanchard with Daniel Leigh, titled “Growth Forecast Errors and Fiscal Multipliers.” Their new study found that the IMF had systematically and consistently underestimated the Keynesian multiplier, and had thus wrongly assumed the correctness of conservative economists’ rejection of Keynesianism. Their comprehensive new study confirmed Keynesianism: “We find that, in advanced economies, stronger planned fiscal consolidation [commonly called ‘austerity,’ the opposite of Keynesianism] has been associated with lower growth than expected.” But such “austerity” was now being sought by congressional Republicans.

And this new IMF study wasn’t isolated, either. In August 2012, the International Labour Office in Geneva had issued “Macroeconomic Policy Advice and the Article IV Consultations: A Development Perspective,” and their study showed that: “The ‘one size fits all’ approach” that the IMF had previously been using, which targets low government spending as being a country’s way out of debt “has an uneasy existence with the empirical literature,” which proves that it doesn’t work. Then, in January 2013, the Center for Economic and Policy Research titled a study “Macroeconomic Policy Advice and the Article IV Consultations: A European Union Case Study,” and found that austerity (“fiscal consolidation”) failed not only with underdeveloped nations but also with EU nations.

Keynesianism was overwhelmingly affirmed, all over the place; all conservative economists should have been fired, they were proven to have been wrong; but instead congressional Republicans just dig in their heels, along with the ever-shrinking minority of ultra-conservative economists, who still favor anti-Keynesian policies, which are justified by bad (and mostly old) studies.

Even when Brady’s Joint Economic Committee Republicans issued in March 2011 their “Spend Less, Owe Less, Grow the Economy,” the main studies they had been relying upon were already discredited and out-of-date. The IMF issued in October 2010, a “World Economic Outlook,” whose entire third chapter was devoted to “Macroeconomic Effects of Fiscal Consolidation.” This summary of the research said: “Based on a historical analysis of fiscal consolidation in advanced economies, … it finds that fiscal consolidation typically reduces output and raises unemployment in the short term,” which causes the taxes that are coming into the government to go down, which causes the government’s deficits and debt to rise in the long term (thus failing at everything). “Fiscal consolidation typically has a contractionary effect on output. … When interest rates are stuck at zero [as they then were], the output cost of fiscal consolidation doubles. … During this time, the central bank is powerless to offset the slump in aggregate demand and inflation induced by the cut in government spending. The resulting fall in inflation raises the real interest rate, which in turn exacerbates the decline in aggregate demand, amplifying the short-term contractionary effect.”

During the following months, more such evidence poured in. A July 2011 “IMF Working Paper” by Guajardo, Leigh and Pescatori, was titled “Expansionary Austerity: New International Evidence,” and it concluded: “Our main finding that fiscal consolidation is contractionary holds up [even] in cases where one would most expect fiscal consolidation to raise private domestic demand,” so that “Expansionary Austerity” was basically just a right-wing myth. At around the same time, Roberto Perotti’s “The ‘Austerity Myth’: Gain Without Pain?” reported at the Bank for International Settlements that, “These results cast doubt on at least some versions of the ‘expansionary fiscal consolidation’ hypothesis, and on its applicability in the present circumstances.” In September 2011, the IMF issued yet another study, “Painful Medicine: … Slamming on the brakes too quickly will hurt incomes and job prospects.” It found: “The pain is not borne equally. Fiscal consolidation reduces the slice of the pie going to wage earners.”

On 18 July 2011, economist Mark Thoma headlined to summarize “The Crumbling Case for Austerity,” and economist Chad Stone bannered “The Crumbling Case for Cutting Spending to Stimulate the Economy.” The matter was essentially closed, even as of 2011. Republicans were just lying, in the same old vein. To cut government spending during a non-expansionary economy – which Republicans especially say that this economy is – would be economic suicide. But this is what Republicans want to do.

Perhaps in order to provide another means of repudiating Keynesianism so as to embrace the sequester cuts, Brady’s “Spend Less, Owe Less, Grow the Economy” report also misrepresented what Keynsianism itself actually is. His summary of the “Keynesian View” didn’t even so much as mention the Keynesian “multiplier,” which is at the core of Keynesian economics, and which the new IMF study, “Growth Forecast Errors and Fiscal Multipliers,” had examined in detail, and had re-estimated upward, when it concluded that the IMF itself had previously underestimated the effectiveness of Keynesian policy – which depends upon there being a large “multiplier effect” from deficit spending on infrastructure and other government investments.

Rather than so much as even just mentioning the “multiplier,” Brady’s report simply assumed that Keynesianism relies instead upon the discredited theory that, as he put it, “additional government debt ‘crowds out’ private investment through a higher real interest rate.” However, that “crowding out” theory actually goes back instead at least as far as Malachy Postlethwayt’s 1757 Great Britain’s True System, which stated: “The national Debts first drew out of private Hands, most of the Money which should, and otherwise would have been lent out to our skillful and industrious Merchants and Tradesmen: this made it difficult for such to borrow any.” The “crowding out” theory had nothing to do with Keynesianism, which was first formally introduced into economics in 1936, in John Maynard Keynes’s The General Theory of Employment, Interest and Money.

Eric Zuesse is the author, most recently, of  They’re Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010, and of CHRIST’S VENTRILOQUISTS: The Event that Created Christianity.

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

February 20, 2017
Bruce E. Levine
Humiliation Porn: Trump’s Gift to His Faithful…and Now the Blowback
Melvin Goodman
“Wag the Dog,” Revisited
Robert Hunziker
Fukushima: a Lurking Global Catastrophe?
David Smith-Ferri
Resistance and Resolve in Russia: Memorial HRC
Kenneth Surin
Global India?
Norman Pollack
Fascistization Crashing Down: Driving the Cleaver into Social Welfare
Patrick Cockburn
Trump v. the Media: a Fight to the Death
Susan Babbitt
Shooting Arrows at Heaven: Why is There Debate About Battle Imagery in Health?
Matt Peppe
New York Times Openly Promotes Formal Apartheid Regime By Israel
David Swanson
Understanding Robert E. Lee Supporters
Michael Brenner
The Narcissism of Donald Trump
Martin Billheimer
Capital of Pain
Thomas Knapp
Florida’s Shenanigans Make a Great Case for (Re-)Separation of Ballot and State
Jordan Flaherty
Best Films of 2016: Black Excellence Versus White Mediocrity
Weekend Edition
February 17, 2017
Friday - Sunday
David Price
Rogue Elephant Rising: The CIA as Kingslayer
Matthew Stevenson
Is Trump the Worst President Ever?
Jeffrey St. Clair
Roaming Charges: Tinker, Tailor, Soldier, Flynn?
John Wight
Brexit and Trump: Why Right is Not the New Left
Diana Johnstone
France: Another Ghastly Presidential Election Campaign; the Deep State Rises to the Surface
Neve Gordon
Trump’s One-State Option
Roger Harris
Emperor Trump Has No Clothes: Time to Organize!
Joan Roelofs
What Else is Wrong with Globalization
Andrew Levine
Why Trump’s Muslim Travel Ban?
Mike Whitney
Blood in the Water: the Trump Revolution Ends in a Whimper
Vijay Prashad
Trump, Turmoil and Resistance
Ron Jacobs
U.S. Imperial War Personified
David Swanson
Can the Climate Survive Adherence to War and Partisanship?
Andre Vltchek
Governor of Jakarta: Get Re-elected or Die!
Patrick Cockburn
The Coming Destruction of Mosul
Norman Pollack
Self-Devouring Reaction: Governmental Impasse
Steve Horn
What Do a Louisiana Pipeline Explosion and Dakota Access Pipeline Have in Common? Phillips 66
Brian Saady
Why Corporations are Too Big to Jail in the Drug War
Graham Peebles
Ethiopia: Peaceful Protest to Armed Uprising
Luke Meyer
The Case of Tony: Inside a Lifer Hearing
Binoy Kampmark
Adolf, The Donald and History
Robert Koehler
The Great American Awakening
Murray Dobbin
Canadians at Odds With Their Government on Israel
Fariborz Saremi
A Whole New World?
Joyce Nelson
Japan’s Abe, Trump & Illegal Leaks
Christopher Brauchli
Trump 1, Tillerson 0
Yves Engler
Is This Hate Speech?
Dan Bacher
Trump Administration Exempts Three CA Oil Fields From Water Protection Rule at Jerry Brown’s Request
Richard Klin
Solid Gold
Melissa Garriga
Anti-Abortion and Anti-Fascist Movements: More in Common Than Meets the Eye
Thomas Knapp
The Absurd Consequences of a “Right to Privacy”
FacebookTwitterGoogle+RedditEmail